CBOE weighs its regulatory role

CBOE Holdings Inc. Executive Chairman Bill Brodsky said the options exchange operator could eventually decide not to carry all of the regulatory duties it's shouldering today.

CBOE is the only major securities exchange that has its own in-house regulatory operation, but with the U.S. Securities and Exchange Commission recently becoming more “aggressive” with respect to such roles, it may let go of those duties.

“The SEC has become very, very aggressive in terms of how exchanges operate their regulatory business,” Mr. Brodsky said in an interview yesterday. “It will cause us to examine: Do we stay in the business or do we get out? We're not at that point yet.”

Chicago-based CBOE doesn't have any timetable for making a decision on that issue, Mr. Brodsky said during the interview on his last day holding the CEO title.

The SEC last September forced the New York Stock Exchange's parent company to pay $5 million to settle a case in which the agency alleged the exchange provided trading data to some customers ahead of others. It also has been investigating CBOE for the past year, scrutinizing whether the exchange's ties to its customers have been too cozy and questioning whether CBOE has fulfilled its obligations as a self-regulatory organization.

Over the past year, CBOE has expanded its regulatory staff, worked with consultants in the area and upgraded its systems to continue in the regulatory business for now, he said. CBOE not only regulates its own exchange business, acting as a self-regulatory organization under the purview of the SEC, it also performs a regulatory function for other options exchanges that outsource the work to CBOE. In fact, CBOE at one time contemplated trying to win more of that business in an industry that has 11 options exchanges.

'THINGS CAN CHANGE OVER TIME'

“For the foreseeable future, we will be doing the regulatory business,” Mr. Brodsky said. “Things can change over time. Right now, we have added to staff, we have tremendous investment in our regulatory operation and we will continue to do that until we decide whether we want to make any changes.”

The CEO transition is happening at a time when the company's stock has risen, closing May 21 at an all-time high of $40.81 a share, after recovering from a decline after it first sold stock to the public in 2010 at $29.

As CBOE continues to expand on its own, banking on the growth of options trading worldwide and further adoption of its exclusive index and volatility products, it has no plans for joining in the industry's consolidation. Still, Mr. Tilly said during the interview that CBOE would always consider offers that might come its way.

“If there's a compelling story today or tomorrow — someone knocking on the door and saying here's the idea, we can merge all this, we love your platform, don't need your people, let's make a deal, we would have to evaluate that from our shareholders' perspective,” Mr. Tilly said.

CBOE is unlikely to go out knocking on anyone's door because once IntercontinentalExchange Inc. buys NYSE Euronext, CBOE is the smallest of four public exchanges, Mr. Brodsky noted.

“You can't go taking over someone who's nine times your size because you don't have the capital to do it,” Mr. Brodsky said.

CBOE buying of the bigger companies' options exchanges is also unlikely because they view options and futures exchanges as expanding profit centers they want to retain. “They're not about to get rid of them,” Mr. Brodsky said.